Investors keep trading in unsustainable stocks

Washington  Investors are still trading common shares of Fannie Mae, Freddie Mac and American International Group Inc. by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the misimpression that the companies may recover or be rescued.

The government continues to support the companies with billions in taxpayer money. Fannie and Freddie buy loans from banks and sell them to investors. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

“There are some folks that believe that somehow that 20 percent (of the stock) that’s out there in the public market might be worth something someday,” said Daniel Alpert, managing director of the investment bank Westwood Capital LLC. But he said the three companies are doomed because they are “massively indebted,” and the values of their assets are declining.

The stocks remain in circulation for two reasons: They’ve violated no rules on the New York Stock Exchange. And no regulator has the power to suspend their trading without evidence securities laws are being violated.

Alpert said no regulations exist to deal with cases where the government props up unsustainable companies.

By contrast, regulators were able to warn investors about stock in the “old” General Motors, which also sits on a mound of government debt. The SEC and the Financial Industry Regulatory Authority, the brokerage industry’s self-policing group, have issued alerts and taken other steps to prevent investor losses on that stock.

In that case, the SEC could act because GM acknowledged the stock was headed for zero in a restructuring plan filed with the SEC.

The SEC says it has no reason to suspend trading of stocks that still technically meet its standards, which include filing timely financial reports and disclosing events that could affect share values.

The NYSE’s rules include maintaining minimum numbers of shareholders and market capitalization. But they give the exchange full discretion over which stocks are listed.

FINRA has jurisdiction over NASDAQ-traded stocks and over “pink sheet” stocks, which are worth too little to be traded on a major exchange. It has no jurisdiction over stocks on the NYSE.

Fannie and Freddie’s government owners haven’t announced their plans for the companies. But the administration is expected to announce in February that the companies will be wound down, merged into a federal agency or have their bad mortgage assets split into a new government-backed company.

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Comments

Sounds as if Keefe, Bruyette, and Woods clients are steamed at the fact that their "advisers" have largely downgraded the current rally that launched in Mid-March..A rally is a rally whether once describes it as a bear market, pie in the sky or whatever..So what does this firm have for an answer?

While their clients funds have simmered on the sidelines, others managers have grabbed the bull market and held on for a 6,000+ point run-up..If K,B,&W remained timid during this rally, then the only answer for these financial snooze-bags is to get out there and attempt to "TALK" the market DOWN..

RISK and REWARD ride the same rail..Get educated, keep some Mylanta on hand, and kick those overpriced commission brokers like K,B, & W to the CURB..YOU and a laptop can DO this!!